Ciena is expected to report a strong set of quarterly earnings on Sept. 1 and flourish well into next year thanks to growing demand for its portfolio of 100G+ products targeting metro markets, according to a leading analyst.
Michael Genovese, an analyst at MKM Partners, has attached a "buy" recommendation to Ciena Corp. (NYSE: CIEN)'s stock, pointing to "accelerating" demand in the US metro market among telcos such as Verizon Communications Inc. (NYSE: VZ), CenturyLink Inc. (NYSE: CTL), Comcast Corp. (Nasdaq: CMCSA, CMCSK) and AT&T Inc. (NYSE: T). (See Ciena Builds on Verizon's Metro Specs and Verizon Taps Cisco, Ciena for Next-Gen 100G US Metro Network.)
In a research note distributed early Monday, Genovese said he believed Ciena would "meet or slightly beat" consensus expectations of 11% year-on-year growth in sales for its third quarter, covering the May-to-July period, and achieve 4% growth in its fiscal fourth quarter.
Based on checks with aforementioned operators, Genovese reckons Ciena is "doing very well competitively" in the US metro market, and "holding its own" in the less developed European region.
Demand for higher-speed technologies is being driven by surging take-up of video, mobile and cloud computing services, with Ciena facing competition from optical networking specialists such as ADVA Optical Networking , Huawei Technologies Co. Ltd. , Nokia Corp. (NYSE: NOK) and Infinera Corp. (Nasdaq: INFN), though Infinera has warned it faces a near-term downturn. (See Infinera Reports Q2.)
Nevertheless, Ciena is due to recognize "mid- to high-single-digit millions" of metro revenues from Verizon in the third quarter, according to Genovese. He also believes that CenturyLink and Comcast have "meaningfully accelerated" metro spending with Ciena and that AT&T will remain an important customer and "grow its contribution in line with Ciena's overall revenue growth driven by incremental metro 100G+ builds."
One slight concern is the pricing pressure in the competitive European market for routers and optical equipment. That has already led to some gross-margin problems for companies such as Infinera and Juniper Networks Inc. (NYSE: JNPR), but Genovese expects Ciena to report a healthy gross margin of 45%, or even higher, in the third quarter, thanks to "high-margin revenues [from] packet networking and software, as well as by diligent supply chain management."
Ciena's share price is currently trading at $21.58, 4.3% higher than at the start of the year.
In the second quarter, the company reported a 3.1% year-on-year increase in revenues, to $640.7 million, and an adjusted gross margin of 45.1%, up from 44.4% in the year-earlier quarter. (See Global Sales Boost Ciena in Q2.)
— Iain Morris, , News Editor, Light Reading